Investors flock to Indian stocks

India may lag behind China economically, but the reverse holds true for their stock markets. India's has soared to a record high this week, driven by foreign investors pouring billions into the market.

Figures show the stock market here is up 200 percent over the past five years, compared with 65 percent in China and 11 percent in the US.

India's edge, experts say, lies in the contrast between its large contingent of private, profitable firms that operate free of substantial government involvement, and the many listed Chinese companies over which Chinese authorities exert considerable control.

"When Chinese companies - which were previously state-owned - were listed on the stock market, the government believed it was best to retain majority control," says Peter Alexander, a former Wall Street banker who now runs the Shanghai-based financial consultancy Z-Ben Advisors. "So around two-thirds of a firm's shares were held back by the Chinese state and couldn't be traded. Theoretically, these shares could swamp the market one day and push prices down, which worried investors."

The large role played by the Chinese state in these firms also leads to concerns that they are run inefficiently and many are thought to be of poor quality, Mr. Alexander adds.

In contrast, several of India's privately run, stock market listed companies, though forced to battle bureaucracy and red tape, are viewed as well managed.

"The efficiency of Indian companies and the transparency of our stock market are much higher," says Bombay-based private investor Rakesh Jhunjhunwala, who has turned $100 into an estimated fortune of $250 million by investing in Indian shares. "People like investing in our free and democratic country, where everything is open and known."

In Bombay, India's financial capital, concerns about the sustainability of the boom often play second fiddle to heady talk about India's economic potential. "I don't rule out a correction, but I rule out a reversal," says Mr. Jhunjhunwala.

Jhunjhunwala argues Chinese companies tend to be concerned with grabbing market share rather than making as much money as possible, whereas Indian firms are well regulated and focused on profits, which boosts their share prices.

Maya Bhandari, an economist at Lombard Street Research in London, contends India offers "a more solid economic foundation compared with China" and that the rise in India's stock market is justified.

"I think if you have a strong economy it's reflected in your equity market," Ms. Bhandari says. "We're forecasting a major slowdown in China from the middle of the year and India may gain from that."

Yet previous Indian market booms during the 1990s failed to last. One was notoriously scarred by scandal and corruption, leaving ordinary private investors out of pocket.

Most Indian private investors are still wary, fearful that unseen market manipulation will reveal the current stock market surge to be chimerical. They are skeptical that India's securities markets are free of corruption and fraud.

Analysts say the Indian government still plays a large role in many areas of the economy, leading to inefficiency. Some are now cautious about the Indian boom. "I wouldn't buy the Indian stock market today," says Marc Faber, an investment expert and the author of the Gloom, Boom and Doom report. "It is not a bargain. If it goes too much higher, it could easily halve. Chinese shares, which were very expensive, are now more reasonable."

Mr. Faber points out that research shows "economic growth and stock market performance can diverge very significantly" over periods of a few years, meaning that a bet on India's stock market could lose money even if the economy performs well.

Nor has the Indian stock market boom created widely spread wealth, since it has "directly benefited a very narrow group of around 50 million people," according to Faber.

Meanwhile the Chinese government, which compared with India has attracted far more foreign investment directly into its economy if not into shares, has begun to loosen its grip on the stock market.

Analysts say the pressure on Chinese businesses to become more profitable is steadily rising, too. "The important thing about the Chinese stock market is not where it's been, but where it's going," says Alexander. "China's government wants Shanghai to usurp Hong Kong, the former British colony, as the country's primary stock market. The reforms will allow larger companies to float their shares in Shanghai."

So far, the stock market has been among the few business areas where India can boast a lead over China. Many experts continue to see good long term prospects. "But this year," says Faber, "I think China will beat India."